Strategies for Fairly Pricing Community Solar Programs

Adam Capage of 3Degrees explores the complex topic of pricing power from community solar programs in an equitable manner.

When a utility offers a community solar (or shared renewable) option to its customers, there are a range of program design questions to address. In previous articles, we’ve talked about project ownership and siting considerations and options for mitigating risks. This article addresses the options for defining the final price to customers of solar energy from a community solar program.

In some states, there is a legislative or regulatory mandate that provides the answer. For example, in 2013 Minnesota passed a law mandating a solar standard for Xcel Energy, as well as a requirement to create a Solar Gardens program to help meet the standard; as a result, Xcel Energy has since defined specific bill credits for solar energy and RECs delivered to the utility.

But for utilities that have voluntarily decided to launch a community solar program, defining the final cost of the solar can be a contentious process. This isn’t surprising when you consider how these utilities are operated and regulated. The cost of utilities’ portfolio of generation is spread across the entire rate base, so all costs and benefits are packaged and priced together. Aside from tiered pricing or time-of-use pricing models, every residential customer pays the same amount for the same bundle of energy, no matter when they use it.

Now along comes community solar, which is premised on the idea that customers will be purchasing solar energy from a specific facility, possibly at a fixed price. This is an entirely different value proposition for the customer. And it raises a number of complex questions for utilities and their regulators: Should customers be able to direct their dollars to a specific resource and then accrue specific benefits, such as a fixed price? How should the public benefits and costs of solar power be addressed? Should these values be calculated and credited to the individual who enrolls, or should ratepayers that haven’t enrolled still share some of the collective costs and benefits?

These are difficult policy questions, and there is no single correct answer. For some utilities, the goal will be to precisely value solar energy; in other instances, stakeholders will want to make the program comparable to rooftop solar; still others will focus on holding non-participating customers harmless by ensuring every possible cost of the solar resource is borne by participants, as with green pricing programs today. Different goals and the resulting terms of each negotiated agreement will determine the net price of each utility’s community solar program.

So let’s think about some of the key options that are being debated. For the sake of discussion, consider this hypothetical program structure. Customers purchase a portion of their total energy, in 250-kilowatt-hour blocks, from a solar resource. Their purchase is reflected on their bill in the form of two new line items, one representing a charge for the solar energy and one that provides a credit for system resources not being used because of the solar purchase.

On the line charging for the solar energy, the cost of the solar energy is the largest component. Program administration and customer education costs are also captured here. For the sake of this example, we’ll leave the more complicated questions to the credit line.

For the line that provides a credit for energy not purchased, the key consideration is how to value that credit. We see utilities considering several options, including:

Full retail rate: This is how rooftop solar is compensated under net metering rules. For utilities that want to make their community solar program approximate the experience of rooftop solar, this is the best option. The financial result will be a net benefit to customers who enroll, which will make the program very appealing. However, this approach doesn’t calculate the actual value of solar in the utility system, which may be higher or lower than the full retail rate. As such, this may raise concerns and discussion about cost-shifting to non-participating customers.

Disaggregated retail rate: Utilities that break out the component charges of their final retail rates may choose to credit customers only for the energy portion of the rate, along with pro-rated fuel adjustments and any other charges that shouldn’t reasonably be borne by customers buying solar energy. Under this option, participating customers may still pay transmission and distribution charges.

FIT rate: This is only relevant in locations that have defined a feed-in tariff rate; in these instances, above-market energy costs for the solar are being spread across the rest of the customer base.

Value of solar: This concept has spurred much debate and many studies, including this one. If stakeholders have agreed on a value of solar, that number can be credited to participating customers.

Avoided cost: By crediting customers with the marginal cost of the next kilowatt-hour, the utility avoids any possibility of subsidy to program participants. However, this presumes there isn’t any other value to the solar energy that the utility can or should recognize and credit to the participating customers.

This topic — how to price, credit and value solar — is at the center of a contentious discussion that we see playing out within utilities and at public utility commissions across the country. Final decisions on how to price community solar will vary, but the future is clear: voluntary, utility-led community solar programs will grow to include hundreds of thousands of customers in the next three to five years.